The Information Content of Earnings Following Restatements

53 Pages Posted: 22 Jan 2006

See all articles by Wendy M. Wilson

Wendy M. Wilson

Texas Christian University - Department of Accounting; Southern Methodist University (SMU) - Accounting Department

Date Written: January 19, 2006

Abstract

This paper examines the information content of earnings following restatements of prior period earnings. Results indicate that the information content of earnings announcements declines in periods following a restatement, but that the loss of information content is temporary. In particular, the earnings response coefficients for earnings announcements surrounding a restatement exhibit a U-shaped pattern in which they return to pre-restatement levels over an average of four quarters, suggesting that the market's concern regarding subsequently reported earnings is somewhat transitory. The extent to which the earnings of restatement firms suffer a loss of information content varies across several dimensions. First, the loss of information content is greater for firms that restate earnings to correct revenue recognition errors than it is for other types of restatements. Second, the information content of earnings is significantly lower for firms that do not make changes to their financial reporting governance structure following a restatement relative to firms that initiate governance changes. Overall, the evidence presented in this paper is consistent with a short-term decline in investor confidence regarding financial reporting following restatements, but that recovery typically takes place within four quarters.

Keywords: Earnings restatement, Information content of earnings, Investor confidence, Earnings response coefficient

JEL Classification: G12, G34, M41, M43

Suggested Citation

Wilson, Wendy M., The Information Content of Earnings Following Restatements (January 19, 2006). Available at SSRN: https://ssrn.com/abstract=877475 or http://dx.doi.org/10.2139/ssrn.877475

Wendy M. Wilson (Contact Author)

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

Southern Methodist University (SMU) - Accounting Department ( email )

United States

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